2. You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can
Question:
2. You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm.
a. What is the total market value of the firm without leverage?
b. Suppose you borrow $1 million. According to MM, what fraction of the firm’s equity must you sell to raise the additional $1 million you need?
c. What is the value of your share of the firm’s equity in cases
(a) and (b)?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781292018409
3rd Global Edition
Authors: Berk, Peter DeMarzo, Jarrad Harford